Investing in Real Estate: A Profitable Option for Long-Term profit

Real estate investment is a tried-and-true avenue for financial growth and also a smart way to diversify your portfolio. Here’s a captivating example to set the stage: the childhood home of Apple co-founder Steve Jobs, a modest property in Los Altos, California, where he and Steve Wozniak famously tinkered with their first computers. It was purchased for just $28,000 in 1976 and went on to sell for approximately $1.3 million in 2020.

The best part is that real estate investment isn’t reserved for the elite. With some capital, patience, and know-how, nearly anyone can get involved. And this guide will show you how to get into real estate investing.

Is real estate investing a good idea?

Real estate investing has always maintained its allure, and it consistently draws investors seeking opportunities for financial growth and stability. Here’s why:

• Wealth preservation and generation. Real estate has a track record of preserving and building wealth over the long term.
• Shelter and basic need. Regardless of economic conditions, people will always require housing.
• Tangible asset. Unlike some investments that may seem abstract, such as stocks or indices, real estate provides a physical property that can be seen, touched, and valued. 
• Tax advantages. These investments offer various tax benefits, including deductions for mortgage interest, property depreciation, and operating expenses.
• Hedge against interest rate swings. While high interest rates can initially deter real estate investments, they can also create buying opportunities.
• Multifaceted strategies. Real estate offers a range of investment strategies, which will be covered in the next section.
• Long-term investment. Despite short-term market fluctuations, real estate values tend to appreciate over time, rewarding patient investors.

So, if you’re interested in exploring the real estate market and believe it’s a good idea, let’s delve deeper into the opportunities.

Different ways to invest in properties

Great news: there are many investment avenues that cater to a range of preferences and financial situations. Here’s how to invest in real estate in a way that suits you:

Real estate crowdfunding

With this strategy, investors contribute funds and, in return, receive debt or equity in a development project. They may also receive periodic distributions of profits. Even though some crowdfunding platforms are limited to accredited investors, others like Fundrise and Groundfloor cater to beginners and allow small investments.

Real estate investment trusts

REITs are companies that own, operate, or finance real estate assets, where investors buy shares and earn a portion of the income generated by the properties within the trust. REITs are traded on public stock exchanges, so you can count on liquidity and high dividends. 

Real estate limited partnerships

RELPs operate as private equity and are not traded on public exchanges. During a set term (7-12 years), they function like small companies that acquire, manage, and eventually sell properties. Profits are distributed to investors along the way. However, they require higher minimum investments.

Becoming a landlord

In this category, you have even more options to generate profit:

• Single-family home rental — You buy a house and rent it out, but make sure the rent must cover your expenses like the mortgage, taxes, and maintenance.
• Short-term rentals — Platforms like Airbnb are great for renting your house or apartment for extra income without a long-term commitment.
• House-hacking — Buy a multi-unit property, live in one unit, and rent out the others to cover expenses.

Each approach has its pros and cons. And you must be extra informed about the local real estate market, as well as the legal and financial aspects of being a landlord. 

House flipping

House flipping means purchasing properties, renovating them, and selling them for a profit. On the one hand, you have the potential for significant gains; on the other hand, it comes with challenges like unexpected problems, budget overruns, and longer timelines. Successful flippers are usually the ones who build a trusted team of experts and maintain cash reserves for unforeseen issues.

Investing in your own home

This is not what you typically think of when it comes to investing. But technically, it is a way to increase your net worth.

Rather than purchasing a home outright, most individuals opt for a mortgage. The process of gradually paying off this mortgage to attain full home ownership is a prudent, long-term investment strategy. This step often comes before venturing into other real estate investments.

How to buy an investment property: steps to get started

Let’s say you’re considering purchasing a property as your investment vehicle. In that case, here are some important steps to get you started:

1. Determine your financial readiness. Take a close look at your current financial situation, especially factors like your savings, income, and credit score. 
2. Define your investment strategy. In other words, clarify your investment objectives. Are you aiming for rental income, long-term property value appreciation, or a combination of both? Your objectives will shape your property and location choices.
3. Create a budget. Consider all associated costs — the down payment, closing costs, property taxes, insurance, and ongoing maintenance expenses.
4. Research the market. Look for trends in property values, rental demand, and vacancy rates and stay informed about local economic conditions and future development plans.
5. Secure financing. Explore mortgage options and obtain pre-approval to determine how much you can borrow. Don’t rush because it’s important to compare interest rates and terms from different lenders.
6. Perform due diligence. Before making an offer, conduct a thorough inspection of the property, as well as find out about potential renovation needs and any legal or zoning issues. Review the property’s rental history (may not apply).
7. Make an informed offer. Once you’re satisfied with your inspection, make a competitive but reasonable offer.

After that, consider hiring a property manager to handle tenant interactions, maintenance, and rent collection.

Risks and challenges

Firstly, the real estate market can be unpredictable. While it has demonstrated resilience, as seen during the lockdowns with all-time highs in some areas, you’re constantly reminded of its unpredictability. Particularly, the 2008 Recession shattered the notion that real estate only moves in an upward trajectory. 

Your location selection might not always work out as planned. Even if you put effort into careful research and consideration, unforeseen factors or market shifts affect the performance of your property. Worst-case scenario: dealing with negative cash flows that ultimately lead to the need to sell the property.

Also, tenants can become a major headache and financial burden. When you have tenants who consistently fail to pay rent on time or, worse, don’t pay at all, you’ll likely find it challenging to cover the property’s expenses. Or they can cause property damage, leaving you with repair bills that eat into your profits.

Another potential issue is mistakes like missing important details or mishandling claims, which cost time and money. Don’t disregard the fact that property management involves handling a lot of data, like tenant information, rent records, incidents, and insurance claims. Without an efficient system, things can get messy. 

Real estate market trends

Want to stay ahead of the property market? Then, here are the key themes from the recent PwC report:

• Workforce transformation — With fewer workers returning to traditional offices, there’s a shift in office space demand. So, landlords must adapt to tenant preferences, and some office spaces may need repurposing. 
• Sustainability and climate change — Climate change resilience is crucial for real estate, and there’s a growing emphasis on ESG disclosure driven by regulations and investor demand. Owners must invest in making buildings more weather-resistant and more sustainable. 
• Deals and capital markets — Lower expected returns and rising interest rates are impacting real estate deals. In 2023, uncertainty about property prices is affecting both buyers and sellers, but long-term investors are still interested in the market.
• Migration to affordable housing — Affordable housing remains a challenge due to undersupply, zoning restrictions, and rising costs, with growing demand for rental housing, especially among young adults. Solutions presented by the PwC team include removing construction obstacles and leveraging technology.
• Metaverse — The most surprising trend is the digital metaverse potentially influencing real estate by enhancing workplace collaboration and offering new investment avenues. However, it also presents data privacy and cybersecurity concerns.

Closing thoughts

Keep in mind that real estate is seen as a less liquid investment. Real estate projects tend to take a considerable amount of time to plan, develop, and start generating returns. Plus, the process of buying and selling properties is quite lengthy and is influenced by market conditions and legal intricacies. So, you should be prepared to hold onto your investment for an extended period to see its potential returns.

If you’re looking for investments with more liquidity, you might want to explore trading assets like currency pairs on Binomo. 

Sources:

A beginner’s guide to real estate investing, Business Insider

Risks and challenges, Investopedia

Real estate investments: assets, markets, and current trends, PwC